12 Retirement Planning Rules for People in Their 40s

Once you’re in your 40s, it’s time to get serious about saving for retirement. | Aaron Davidson/Getty Images for Haute Living

Your 40s might be the most important decade when it comes to preparing for retirement. For one, you’ve likely hit your peak earning years, with several studies showing pay tends to level off for most people around age 40. If you’ve been waiting for a big income bump to start saving, you might be out of luck.

Also, once people reach their 40s, they’ve probably checked off some other big items on their financial to-do list, such as paying off student loans and buying their first home. That means they should be free to devote both their attention and financial resources to preparing for what happens after they stop working. And with roughly another 20 to 25 years before they say goodbye to the office, people in their 40s still have time to accumulate a significant chunk of money for retirement.

But many 40-somethings aren’t sure whether they’re making the right retirement-planning moves. You might be wondering whether you’re saving enough, are investing too cautiously (or too aggressively), or whether you still have enough time to hit your savings goals. Whether you’ve been contributing to your 401(k) for years or are just getting started, here are 12 retirement planning rules 40-somethings should keep in mind.

1. Take stock of your situation

“The first thing people need to do is take stock of where they are,” Chris Cooper, a certified financial planner based in San Diego, told The Cheat Sheet. That means having a good handle on your income, expenses, and liabilities. Once you have that information in hand, you can start making smart decisions about how much you can save and invest for your future.

2. Don’t guess at your savings target

You need a retirement plan if you don’t have one already. | iStock.com

Deciding how much you need to save for retirement shouldn’t be a guessing game. Yet that’s exactly how many Americans approach setting retirement goals. More than half of Generation Xers — many of whom are in their 40s — said they picked a random number when determining a retirement savings target, a 2016 survey by retirement plan provider Transamerica found. But guessing at how much to save is a problem because it can lead to not saving enough or not investing in a way that will position a saver to reach his or her goals.

A better approach for people in their 40s is to set a clear retirement saving target. “They should know how much money they actually have to have for retirement,” Herb White, a certified financial planner and president of Life Certain Wealth Strategies in Greenwood Village, Colorado, told The Cheat Sheet.

Determining how big of a nest egg you need isn’t always easy because it depends on your desired lifestyle in retirement, income, when you plan to stop working, how long you’ll live, projected growth on investments, and other factors. Financial advisers can help project what you need to save, and there are plenty of rules of thumb out there to help you get an idea of a reasonable target.

Fidelity suggests aiming to have eight times your final salary in savings by your 60s. And the Center for Retirement Research says most people should save about 15% of their current income in order to have a comfortable retirement.

3. Save as much as you can

Ramp up your retirement savings in your 40s. | iStock.com/AndreyPopov

People in their 40s should focus on setting aside as much as possible for retirement, especially if they haven’t already made saving a priority. If your employer makes 401(k) matching contributions on your behalf, you should contribute at least up to the matching amount, White said, and up to the maximum contribution amount if possible. That’s $18,000 in 2017. Contributing as much as you can to an IRA — $5,500 in 2017 — is also a smart move, he added.

Still, many people don’t seem to be getting the message about the importance of saving for retirement. Thirty-nine percent of workers between the ages of 35 and 54 aren’t saving for retirement, according to a survey by the Employee Benefit Research Institute. And 45% of people in that age group had less than $25,000 saved.

4. Prioritize

Make a list of your financial priorities. | iStock.com/Tomwang112

Should you save for college for the kids or put the money in your IRA? Upgrade to a bigger house or max out your 401(k) contribution? Use your bonus to splurge on a vacation or save for the future? In your 40s, you might find yourself, and your money, pulled in a bunch of different directions. Because you can’t do it all, you’ll have to decide what’s most important.

Many experts say your retirement should come before most other financial goals. Some people want to focus on paying down a mortgage or student loans instead of saving, but that can be risky if it puts you behind in your savings, according to certified financial planner Denton Olde. If you’re having trouble deciding what comes first, your best bet might be to meet with a financial planner, who can bring an objective eye to the situation.

5. Pay off high-interest debt

Is credit card debt keeping you from saving for retirement?l | iStock.com

You might be able to balance paying off low-interest debt, such as a mortgage or student loan, with your retirement saving goals. But there’s one type of debt that should probably take priority over most retirement saving: credit card debt. If you’re in hock to Mastercard or American Express and paying double-digit interest on what you owe, throw everything you can at those bills (after putting enough in your retirement accounts to get your match).

The return you’ll get by reducing your credit card or other high-interest debt likely beats what you’d get in the stock market. And if you’re aggressive about paying off what you owe, you could be debt-free sooner than you realize. Then, you can shift back into retirement savings mode.

6. Don’t let emotions rule your investing decisions

Don’t get too caught up in the day-to-day action on Wall Street. | Stan Honda/AFP/Getty Images

Are you making changes to your investment portfolio every time the market rises or falls? If so, you could be setting yourself up for failure. “Pay no attention to the headlines in the paper or people on television,” investor extraordinaire Warren Buffett has said. “When people get scared other people get scared, and when they get exhilarated, [other people] get exhilarated. Emotions are contagious, and emotions have no business in investing.” In other words, let logic, not your feelings, guide your retirement planning decisions.

Of course, that’s easier said than done. Reacting emotionally is understandable, especially when it comes to your life savings. But most people in their 40s shouldn’t let the natural ups and downs of the market scare them away from investing. “If you’re that far away from retirement, it’s good to stay invested,” White explained. “In the long run you have time to recover.” And Cooper echoed that advice. “You have to be able to roll with the punches,” he said.

7. Don’t treat your retirement accounts like an ATM

Your 401(k) isn’t an ATM. | iStock.com/snyferok

Your 40s will likely be your peak earning years, but this decade can also bring increased financial challenges. Many people in this age group find themselves trying to balance saving for retirement with paying for a child’s college education, covering a mortgage and other debt payments, as well as meeting day-to-day expenses. Some people might cut back on retirement contributions to balance their household budget, even though it’s hard to make up for those lost saving years. But even worse is taking early withdrawals from retirement accounts.

“The biggest mistake I see people make is not keeping their retirement money retirement money,” Cooper said. Whether it’s cashing out rather than rolling over a 401(k) when they change jobs or borrowing from savings for other expenses, draining retirement accounts puts people at a big financial disadvantage. Thirty-three percent of workers in their 40s cashed out their retirement savings when they changed jobs, Bloomberg reported, taking an average of $17,212 with them when they went, potentially losing out on tens of thousands of dollars in tax-deferred investment growth.

8. Keep future taxes in mind when investing

Having a 401(k) is great, but that account shouldn’t necessarily hold all of your retirement savings. White recommended people consider “tax-diversified investments.”

In other words, spread retirement savings among tax-deferred accounts, such as a 401(k); accounts that generate tax-free retirement income, such as Roth IRAs and Roth 401(k)s; and even taxable investment accounts, which might be a good place for investments that will be taxed at capital gains rates rather than the higher ordinary income rate. “You can really control how much tax you pay in retirement” with this strategy, White explained.

9. Fight lifestyle creep

In your 40s, you’re probably earning more than you ever have in your life. You’ve been working hard for decades, and you feel you’ve earned some rewards. Before you know it, you’re spending money on a bigger house in a nicer neighborhood, a fancier car, a cleaning person to keep your place sparkling, and swankier vacations. You can afford all those things today, but if you’re spending instead of saving now, you could be in for a downgrade when you retire.

“Increases in lifestyle spending not only mean there’s less money left to save, but also that higher lifestyle spending means we need even more to retire in the first place,” financial expert Michael Kitces explained. If you can rein in your spending now, you’ll not only have more to save, but you’ll get comfortable living with slightly less, so you’ll need less money when you retire — a win-win.

10. Plan for the unexpected

Are you prepared for a financial emergency? | iStock.com

You have your future all mapped out, but life might have some surprises in store for you. That’s why you want to plan for the unexpected, especially when you hit middle age. You have less time now to recover from a financial setback before retirement, and you probably have more responsibilities (such as a family and mortgage) than you did in your 20s or 30s.

Stashing some money in an emergency fund is the first step in preparing for the unexpected. Try to save three to six months of expenses — enough to see you through a short bout of unemployment. But an emergency fund alone isn’t enough.

Disability insurance will replace some of your income if you suddenly can’t work — an event that’s more likely to happen than you might realize, according to Council for Disability Awareness statistics. Life insurance for you and your spouse will replace lost income if the unthinkable occurs. You might also need other types of insurance, such as umbrella insurance or long-term care insurance.

11. Prepare to work longer

Planning to work longer could mean a more secure retirement. | iStock.com/monkeybusinessimages

The average age for retirement has been creeping slightly upward in the U.S. for years, and it sits at roughly 64 for men and 62 for women, according to the Center for Retirement Research. But many people are still retiring too early, even though it often puts them in a financially precarious position. “Working longer is a key to a secure retirement,” the center’s report noted.

Not everyone has a choice about when to retire. Layoffs and health problems force some people out of the workforce sooner than they would like. But people who could continue to work and still choose to retire early might be at risk of running out of money later in life. “We need to accept that working until 70 and deferring Social Security until age 70 are good things,” Cooper said. “It’s not a failure. A failure is retiring at 62 when you’re not ready.”

12. Get educated

A couple meets with a financial planner. | iStock.com/Minerva Studio

Not taking the time to get educated about basic financial concepts is one of the biggest retirement planning mistakes White sees people make. “People don’t take the time to become financially literate,” he said. “It’s your future, and it’s important to be actively involved in the success or failure of your future.”

Financial advisers can be helpful for people who aren’t sure what their next retirement planning move should be, White explains, as can online resources, books, and information from your employer or retirement plan provider. Getting advice from people who have been there and done that can also be valuable. “Sometimes it’s really helpful to talk to someone who’s already retired. They can tell you what they would have done differently,” White said.